Stimulus working in Japan. Austerity failing in Europe. Will economists learn?
by David Atkins
I noted a few days ago how the inflation rate has dashed the expectations of conservative economists by remaining stubbornly low, then pointed out (as Paul Krugman has been gleefully doing for months) that conservative economists have been proven wrong about nearly everything:
The world is in deflationary spiral, not an inflationary one. Just as Keynesian economists predicted, and as conservative economists insisted could never happen.
Throw this in there with the disproven claims that bond vigilantes would punish the dollar for the S&P downgrade, that tax cuts would lead to economic growth, that deregulation would lead to endless prosperity and self-policing markets, that lower taxes would lead to increased revenues, and that austerity would lead to increased investor confidence and lower unemployment. All wrong. Dead wrong.
Add to that the success of stimulus and failure of austerity, Japan versus Europe edition:
Even as Europe fell deeper into what just became its longest recession since World War II, Japan posted an unexpectedly robust growth rate of 3.5 percent under the bold new stimulus measures championed by Prime Minister Shinzo Abe — precisely the medicine many have urged European leaders to take.
“The elites in Europe don’t learn,” said Stephan Schulmeister, an economist with the Austrian Institute of Economic Research. “Instead of saying, ‘Something goes wrong, we have to reconsider or find a different navigation map, change course,’ instead what happens is more of the same.”
He added, “Angela Merkel is not willing to learn from the Japanese experience,” referring to the German chancellor.
Since taking office in December, Mr. Abe has pushed a three-pronged program — called the three-arrowed approach in Japan — to end two decades of stagnation in the Japanese economy. It involves a strongly expansionary monetary policy, increased fiscal spending and structural changes to improve competitiveness; the first-quarter growth spurt suggests that his approach is already paying off.
Not only have exports improved, the logical outgrowth of a weaker currency, but consumer sentiment and household consumption also have risen. “The real economy is responding,” said Adam S. Posen, president of the Peterson Institute for International Economics in Washington. “The last five months, six months, there’s been a mini consumer boom. All the things that people said could never happen in Japan have turned around.”
He added: “Japan’s central bank is supporting recovery, and it’s working. The European Central Bank is supporting stagnation, and it’s working.”
If there were justice in the world and economics were an actual science like it pretends to me, every conservative and neoliberal economist who has made wildly wrong predictions at the expense of traditional Keynesians would find their careers and livelihoods in jeopardy. But that's not how the system works. Economists who tout the corporate line serve on boards where they are extremely well-compensated for continuing to infect the academic bloodstream with wildly fallacious theories that have no bearing on reality. Remember this particularly compelling segment of the outstanding docmentary Inside Job:
The time is long past for policy makers to do what works and leave aside what doesn't. There is a temptation (as Digby has noted) to see economics as a morality play in which the poor and middle class must suffer for the sins of the rich. But that does not good policy or economics make.
If the profession of economics refuses to act like a real science and make predictions based on available data rather than on conservative political morality, then it should should have the same impact on public discourse and policy that astrology and young earth creationism do.
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